Sachin PalMoneycontrol Research
Havells India, is one of the largest electrical equipment companies in India with a product portfolio ranging from home and kitchen appliances, lighting, switchgear, cables and wires. Since its listing in 1992, the company has been a phenomenal wealth creator for its shareholders and delivered a compounded annual growth rate in excess of 30 percent during its 25 year trading history. A careful reading of its latest annual report throws interesting insights into the business.
Leveraging technology to generate operating efficiencies
Despite being a consumer durables company, Havells has a strong technology focus. The company is increasingly integrating technology with its core business to streamline supply chain and other business functions.
During 2017, the company rolled out a distribution management system (DMS) to its network of 1,300 distributors. The DMS serves as a mini enterprise resource planning (ERP) tool and allows multiple functionality from monitoring of receivables to inventory management. Besides this, it has also launched dealer (Havells mKonnect) and retailer (eSampark) apps in an effort to reduce manpower costs and facilitate better cash flow management.
The management has stepped up its investments in IT infrastructure. It has completed more than 200 IT projects in the past 2 years to bring in business efficiencies across departments. Aided by technological improvements, employee costs have seen a reduction from 8.3 percent in FY17 to 8.1 percent in FY18.
Increasing retail presence along with technological advancements have resulted in better cash flow management and sharp reduction in cash conversion cycle over the past few years.
Consolidating market presence through acquisitions and divestments
The management continues to rationalise its business offerings. It carried out a number of divestments in FY18. These include: 1) Sale of its remaining 20 percent stake in Feilo Malta (formerly Havells Malta) to Shanghai Feilo Acoustics for 34.5 million euro; 2) Divested its entire stake in Havells Sylvania (Thailand) to Feilo for 1.6 million euro; and 3) Terminate its 50:50 joint venture (JV) with Shanghai Yaming Lighting due to technological changes in the lighting Industry. The JV was formed with the objective to produce energy efficient lighting lamps but has been a drag on group profitability in the past few years. In FY18, the JV reported a loss of $4.4 million on account of asset write-downs due to liquidation. In FY17, the JV had a turnover of $16.20 million and reported a loss of $0.6 million.
The company acquired the consumer durable business of Lloyd Electric & Engineering (LEEL) and trademark ‘Lloyd’ from Fedders Lloyd for an enterprise value of around Rs 1,500 crore. The acquisition of Lloyds, which was completed last year, has helped broaden its product portfolio and gain market presence.
Diversifying product mix and expanding to newer segments
Revenue from switchgears de-grew in FY18 on account of weak housing demand. To counter the slowdown Havells has launched an array of new products: photo-voltaic range, surge protection device, industrial plugs and sockets, communication ready miniature circuit breaker and modular contactor.
The company already has a multi-brand portfolio in place (Crabtree, Havells, Standard and REO) to cater to different customer segments. It has also entered into a tie-up with South Korean major Hyundai Electric & Energy Systems for technology transfer for a magnetic contactor. Besides gaining technical know-how, Havells will also benefit from equipment supply such as MCBs and magnetic contactors to Hyundai Electric for overseas markets.
Havells’ performance in the cables segment stagnated in the year gone by. During FY18, the company forayed into the extra high voltage segment and increased focus on business-to-business sales. It has strengthened its communication cable portfolio by launching speaker wires, closed-circuit television (CCTV) wires and local area network (LAN) cables.
The lighting segment recorded a growth of about 19 percent in FY18. The company is spending on research and development to provide innovative solutions such as Street Com Intelligent Lighting as traditional lighting have been on a decline and LED now constitutes 87 percent of the business. It has also enhanced its business connect with the architects and lighting experts to push sales in this segment.
On the consumer durables side, growth is being driven by its ‘deeper into homes’ strategy. The company added newer products - water purification and personal grooming - in this category.
Lloyds is positioned as a pure mass brand. However, Havells through its brand development and distribution is trying to reposition it as a premium brand within the same customer segment. It has also tied up with modern retail stores (Reliance and Croma) to increase its market presence. As a part of its expansion strategy, it plans to add refrigerators under Lloyd’s portfolio, which currently consists of air conditioners, washing machines and televisions.
Sharp rise in intangibles and low amortisation rate is a key concern
The company has witnessed a sharp jump in intangibles after the acquisition of Lloyd’s business. It recorded an amortisation of just Rs 22 crore as against an intangible asset size of Rs 1,553 crore at the end of FY18. This translates to an amortisation rate of just 3 percent on average intangible assets of Rs 809 crore.
Other key risks include slowdown in housing and infrastructure which could pose revenue growth challenges in the near term. Profitability and margin could also be impacted by rising commodity prices.
Outlook and recommendation
Havells has a strong foothold in the sector and seems well positioned to benefit from product premiumisation and penetration.
The stock currently trades at 37 times FY20 projected earnings and seems priced to perfection. However, given its strong positioning, we recommend accumulating the stock during corrections.
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